The fortunes of the North Sea OSV sector continue to ebb and flow and while signs of life are emerging, it is the age-old problem of oversupply that continues to hamper growth
Vessel owners and operators in the North Sea continue to face challenging market conditions. Despite a recent uptick in term demand and fixture activity, coupled with a steadily rising rate of utilisation, the age-old problem of an oversupplied market continues to limit the speed of any potential recovery.
For the last few years, the situation has been grave, with vessels stacked, low day rates being accepted for previously lucrative contracts, and various owners forced into significant financial restructuring plans. In their most recently published financial results – which in many cases come with deliberately-vague market outlooks – many owners have expressed concerns over the future of the North Sea PSV and AHTS markets.
Is this pessimism justified, or are they simply trying to keep a lid on any perceived market positivity, which may have come from a relatively busy 2018 summer season? Indeed, Q2 saw a plethora of new and extended contracts awarded on a seemingly weekly basis and the statistics show that based on vessel demand numbers, the lowest point of the market has now passed.
Perhaps vessel owners are simply trying to avoid repeating previous mistakes – notably the overbuilding of new tonnage during lucrative times. In large part, this caused the OSV market to become such a tough trading environment for vessel owners in the North Sea and elsewhere.
Take the current OSV lay-up situation, for example. It is no secret that since the onset of the latest downturn in the oil and gas industry, most vessel owners have been forced to lay-up PSVs and AHTS vessels. In some cases, vessels only a few years old, ordered at yards in Norway at high cost during the peak of the market, have been stacked.
Figures from IHS Markit show that the number of vessels in lay-up in the North Sea is declining
According to market intelligence firm IHS Markit, at the time of writing (September 2018) there are around 120 PSV and AHTS vessels in lay-up in northwest Europe. At its peak in January 2017, there were over 180 vessels laid-up in the North Sea, showing that several vessels have found a way out of lay-up. In the majority of cases they have commenced long-term contracts in the North Sea or further afield, while some have been sold out of the market. Globally, the high point for vessel lay-ups came in November 2017, when 1,216 ships were cold stacked. In September 2018, the number was down to 1,074, and the decline can be interpreted in different ways, depending on your position in the market.
“2017 was the first year on record in which the number of newbuilds joining the market was less than the number of vessels exiting the market through attrition”
The reduction may lead to some analysts believing the market has improved significantly. Others – including some shipowners – will say that even more vessels need to be removed from service and placed into lay-up for the market to improve. There is also a theory that much of the laid-up fleet – some of which has been stacked for well over two years – may never come back into service and therefore the picture is much brighter when older, uncompetitive units are removed from the equation.
To get a vessel back into working condition after such a long lay-off can be very expensive, especially if regulatory class surveys have to be completed and passed. Given that this cost may top US$2M in some cases, are there enough long-term contract opportunities to justify such a cost? The one- or two-year supply duty charters may be there for PSVs in the North Sea, but the current oversupplied nature of the market means that charterers have the power to secure vessels at day rates not far removed from the cost of running the vessel.
Turning to the spot market
Many chartering companies are turning their attention to the spot market in the North Sea on a more regular basis. They see little need to lock vessels in for long periods at current day rates, when they have the power to continually extend spot contracts for as long as they need.
The issue of scrapping and selling vessels out of the North Sea OSV market continues to be a hot topic. Positively, 2017 went down as the first year on record in which the number of newbuilds joining the market was less than the number of vessels exiting the market through attrition, and that momentum has gathered pace in 2018.
In mid-September 2018, 35 newbuilds have been delivered into the market worldwide this year, compared to 79 leaving the market. In 2017, the numbers were 95 permanently removed from the market, with only 64 newbuilds joining. One year earlier, in 2016, 49 more newbuilds joined the market than those leaving via attrition. In many respects, however, it has simply taken far too long for a noteworthy amount of attrition to take place and the market is most definitely suffering as a result.
Vessel owners themselves know that they need to scrap more tonnage, or get vessels out of the market by some other means, yet some seem loathe to do it in any great number. Danish giant Maersk Supply Service has embarked on a significant divestment programme by letting go of several vessels, while rival Norway-based owner Havila has been very active in selling what it describes as ‘non-core’ PSVs of late. More owners need to follow this lead, however. In its most rectly published financial results, established player Siem Offshore made it clear what needs to happen for the oversupply situation to change.
Despite posting a return to the black in its financials – with the sale of subsidiary Siem Offshore Contractors helping the owner to a net gain of US$90M in Q3 – Siem remained concerned for the future of the North Sea OSV market. It said: “The North Sea offshore support vessel market showed continued weakness in the second quarter. Our expectation for the North Sea spot market for the quarter was not met due to lack of drilling campaigns and rig moves. AHTS and PSV fleets continue to suffer from oversupply on a world-wide basis.”
Offshore construction vessels did experience an improved utilisation rate for the period, but at soft day rates and Siem noted: "We believe that the market rates will remain volatile and generally at low levels in [the] second half 2018. Owners will need to scrap older, less efficient vessels and put more vessels into lay-up in order to balance the supply and demand for offshore supply vessels. The timing of a significant sustainable improvement in utilisation and rates remains uncertain and this situation will continue to place financial pressure on owners and lenders."
The Malaviya Seven is one of several vessels recently leaving lay-up in the North Sea
A glimmer of hope
Norway-based Eidesvik Offshore and SolstadFarstad also highlighted market concerns when providing their respective commentaries. However, one company stands out as regards market sentiment: investor S.D. Standard Drilling has amassed a fleet of five 100%-owned PSVs in addition to nine part-owned PSVs.
It has taken advantage of historic low sale values to build up a quality fleet at relatively low cost, which is likely to be very successful in the future should the market continue to progress positively. It said in a statement: “The company expects that there will be an upturn in the market in the North Sea Sector going forward and is well positioned to take part in the expected upturn. The company has a sound financial position and…is in a good position to take advantage of any investment opportunity that may appear.”
S.D. Standard Drilling’s optimism is not predicated on faith alone. Overall term utilisation in both the North Sea and internationally is on the increase. IHS Markit figures show that in August 2017, term utilisation in the North Sea reached 39.9%; one year later, that had increased to 43.8%. Term utilisation for PSVs and AHTS vessels worldwide, meanwhile, has increased from 44.4% to 46%. Should some of the cold-stacked fleet be discounted, some analysts will point to a much higher ‘actual’ level of utilisation in the North Sea, and therefore a market which can be looked at much more positively.
Those searching for positivises can also point to increased opportunities for North Sea PSVs and AHTS in terms of the type of work supported. The rig market continues to be a big driver of North Sea PSV term activity – with conditions in that market starting to show steady signs of improvement. Norway remains the most active market regarding semi-submersible rigs, while according to IHS Markit the West of Shetland is getting busy thanks to recent tenders for work from BP, Siccar Point and Total.
“It has taken far too long for a noteworthy amount of attrition to take place and the market is most definitely suffering as a result”
Semi demand is forecast to increase from 2018 to 2019, and then further into 2020, which can only be a positive for the supporting OSV market. The jackup market in Northwest Europe also continues to tighten, with an indication that rig day-rates are increasing, albeit not by much, but there is at least some positive movement there. OSVs are also finding work in other markets, such as aquaculture and offshore windfarm support; the latter in the southern North Sea sector is becoming a more regular source of non-traditional PSV demand. And then there is support work relating to decommissioning, which will clearly result in an increase in demand for OSVs in the North Sea in years to come.
There are currently over 80 decommissioning projects in Northwest Europe which are in either in the working, tendering, possible, or planned stages according to IHS Markit. Of these projects, 68% are located in the UK sector, with 18% in Norway. With many of these projects requiring general supply vessel support, opportunities are there for PSV and AHTS operators looking for long-term work slightly removed from the traditional OSV sector.
Statistics relating to supply, demand and utilisation, as well as the number of vessels in lay-up and those entering and exiting the sector, show that the North Sea OSV market remains in a transitional phase. Anecdotal evidence from vessel owners suggests that while some market improvements have been noted over the last few months, many challenges remain, notably the issue of oversupply. As demand steadily improves, shipowners are well aware that this improvement can only be capitalised on if oversupply is addressed.